MLPs are structured to pass on most of their cash flow in the form distributions, and have been a tidy way for yield-starved investors to participate in the U.S. energy renaissance and shale-drilling boom. MLPs ETFs pay taxes, and so do ETF investors. If you own an individual MLP, taxes are largely deferred.

The newness of the fund and the index mean a dearth of historical information, and retail investors should do extra homework. A quick glance at the tickers of these “juniors” shows they carry much more risk than the typical MLP, and not just because market capitalization is small, ranging from $226 million to $2.3 billion.

The typical MLP is a largecap pipeline that collects steady, long-term fees. About 40% of the cohorts in the Junior MLP index are small exploration and production companies, 13% are refiners and three are in the coal business, according to the fund fact sheet. Those MLP sub-industries can carry significant commodity price exposure. Nice upside potential? Sure, but ditto for downside spikes. The offset is “it is a much more balanced index, which provides some additional sector diversification with about 40% exposure to energy transportation (pipelines),” Global X co-founder and CEO Bruno del Ama tells Barron’s Online.

Refiners were big winners in 2012, though coal companies were in the dumps. So how would this index have performed over the past 12 months? Global X says it can’t comment. We did some quick calculations. Take out four MLPs that started trading during 2012 and lack a 12-month history, and the Solactive Junior MLP index performed half as well as the benchmark Alerian MLP Index, which was up about 7%.

While perhaps a good position to start from, the yield on the Solactive smallcap MLPs is another matter.

The yield on the 25 Solactive members is 9%, according to Thomson, above the Alerian MLP Index yield of about 6%. A higher-than-average MLP yield can indicate greater risk of distribution cuts. That’s a death knell for MLPs. Two companies in the Solactive Junior index cut distributions over the past five years: Dorchester Minerals (DMLP) and Eagle Rock Energy Partners (EROC), according to Thomson Reuters.

Funds that hold MLPs don’t offer the same tax benefits as owning an individual MLP. But owning MLPs in a fund can be simpler. A CEFconnect.com screen for MLPs shows 20 closed-end MLP funds; there are more than a dozen exchange-traded products and a handful of MLP mutual funds too. See our post on the proliferation here.

Of risk, CEO del Ama says that smallcaps eventually may benefit from acquisition premiums and Baby Boomers seeking out income-bearing investments.

“The more risk you take the more potential reward,” del Ama tells Barrons.com in an email. “We believe there are significantly more growth opportunities in the junior MLP space. All existing MLP ETFs target large cap exposure, and we’ve seen increasing interest in the market for a fund like this. This is a complement fund that picks up where other funds leave off …”

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.